The pound soars !!

UK is bankrupt - soon 1 to 1

The pound, like the dollar, will continue to get creamed. The UK central bank will have to keep the printing presses on full blast. Want get yourself depressed? Google for a chart showing the pound versus gold. Comparisons to other fiat currencies are not nearly as valid.

FROM TIMES ONLINE.8 MARCH 2010


Rejoice – the pound is down again Commentary: Anatole Kaletsky

While Britain was panicking about a sterling crisis and the terrifying financial consequences of a hung parliament, I spent last week in Japan. It was a good vantage point to put Britain’s financial and political travails into perspective.

Japan’s budget deficit of 10.5 per cent of GDP is this year second to Britain’s among the G7 countries, but in every other respect the fiscal situation in Japan is far worse. Because the Japanese Government has borrowed similarly prodigious sums almost every year since 1990, it carries by far the world’s heaviest debt load, with net public debt now running at 115 per cent of GDP, about the same as in Italy and Greece. And there is not the slightest prospect of any reduction in borrowing in the foreseeable future because of the political situation in Japan. It has had four prime ministers in three years, its civil service is in more or less open warfare with the elected politicians and there has been no effective government since the resignation of Junichiro Koizumi in 2006.

In view of all these horrors it may seem entirely reasonable that Japan’s credit rating was downgraded back in 2002, putting the country on a par with Latvia and below Botswana. Is a similar downgrade now the fate that awaits investors foolish enough to lend money to Gordon Brown’s “bankrupt Britain”? They should be so lucky! In the period since Japan’s credit rating was downgraded, Japanese interest rates have remained rock-steady at the world’s lowest levels, Japanese government bonds have been among the world’s best-performing and lowest-risk investments and the yen has risen by 25 per cent against both the dollar and the pound.

In making these comparisons I do not suggest that Britain should emulate Japan’s policies or envy its economic performance. Far from it.

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What Britain can learn from the Japanese experience is that these conditions are closely linked — a strong currency and bond market, far from being a reason for national pride, is often a sign of serious economic malaise. A weak currency, on the other hand, is something to be celebrated and encouraged, especially in a period of weak global growth.

That, in fact, was precisely the reaction in Japan to last week’s slide in sterling. Visiting one of the country’s top economic officials with a small group of British journalists the day after sterling fell below $1.50, this is how we were greeted: “Ah, you are from Britain. Congratulations. You must be very happy about what is happening to the pound.” That this comment was not an ironic joke became very clear a few hours later when we spoke to the chairman of Komatsu about the prospects for his company’s business in Britain:

“A few years ago,” he remarked, “I kept asking the British Ambassador when will Britain join the euro. But today I am very glad with hindsight that you didn’t do it.”

Does this mean that the fall in the pound last week should also be a cause for celebration, rather than panic, in Britain? The short answer is “Yes”, with just two qualifications.

A weakening pound is good for Britain at present, not only because it tends to boost economic growth by making British goods and services more competitive on world markets, but also because it will help to rebalance the structure of the economy. If Britain has become overly-dependent on consumption, housing and government spending, then a weaker currency is one of the most effective ways of redirecting resources towards exports and manufacturing. And manufacturing is not the only sector that benefits from a weaker currency. Financial and business services will also enjoy a boost from the weakness of the pound. The City of London mostly bills its customers in dollars and euros, but pays costs denominated in sterling. As the pound has fallen, therefore, Britain’s financial and business services have become much more profitable, helping to offset the increased taxes and regulatory costs and discouraging the exodus of business from London to Geneva or Singapore.

The first qualification to the general rule that a weak currency is good for the economy is that, while a weak currency helps businesses and boosts profits, it hurts the purchasing power of the British people who want to spend their money on foreign goods, holidays abroad or villas in Spain.

The second, more substantial, objection to a weak currency is what it can do to interest rates, if the Bank of England reacted to the falling pound by raising short-term interest rates or if investors responded by selling British government bonds and thus driving up long-term rates.

This is what often happened in “sterling crises” in the bad old days when Britain’s economic managers were obsessed with trying to fight off the speculators attacking various artificial currency regimes, most recently the European exchange-rate mechanism, which blew up in 1992.

Since 1992, however, neither the Bank of England nor the Treasury has made any effort to “defend” any particular value of sterling — and the chances of the British authorities suddenly deciding to do so in the future are virtually nil. And as long as the Bank keeps short-term rates near zero, long-term bond yields will also remain very low, as they have in Japan. This will remain true, almost regardless of how much money the Government needs to borrow, for the simple reason that banks will continue to be guaranteed an enormous profit if they can borrow for next to nothing from the Bank of England and then lend-on the proceeds to the British Government at interest rates of 3 or 4 per cent.

Anyone who believes, therefore, that a weakening pound will somehow force British interest rates to move sharply higher has not been paying attention to the changes in economic management, not only in Britain but around the world, since the early 1990s. In this new philosophy, a weak currency is something to be desired and encouraged during periods of recession, when employment and output need additional stimulus.

A strong currency, on the other hand, is desirable during boom periods, when economic activity needs to be restrained to prevent inflation. Right now, every big economy in the world, with the possible exception of China, needs extra stimulus — and therefore wants to have a weak currency. But that, of course, is impossible, since for every currency that weakens, another currency must go up. And that mathematical inevitability could well turn out to be a significant economic headache in the year ahead for Britain.

If economic recovery in the eurozone and Japan turns out to be slower than in Britain, while political conditions in America continue to deteriorate, the weakness of the pound may be impossible to sustain.

Rather than sterling weakness, the real problem in the year ahead for Britain is likely to be sterling strength.



Any comments ?

I'm just a dumbo, but it made sense to me